Archive / Investment Adviser (Level 2) / Tax Provisions for Special Cases
nism-series-xb-buyback-of-shares-dividend-taxation[ INVESTMENT ADVISER (LEVEL 2) ]
ABC Ltd., a domestic company, buys back shares from Mr. X on 20-02-2025. As per NISM Series X-B Chapter 13, how is the amount received by Mr. X taxed, and what happens to the cost of acquisition of the shares bought back?
[ A ]The buyback proceeds are taxable as dividend under 'income from other sources' with no deduction for the cost of acquisition, and the cost of acquisition of the bought-back shares is treated as a capital loss eligible for set-off[ CORRECT ]
[ B ]The buyback proceeds are exempt under Section 10(34A) in Mr. X's hands, while ABC Ltd. pays buyback distribution tax at 20% plus applicable surcharge and cess
[ C ]The buyback proceeds are taxable as long-term or short-term capital gains in Mr. X's hands, with the cost of acquisition of the shares allowed as a deduction
[ D ]The buyback proceeds are fully exempt in Mr. X's hands, and ABC Ltd. bears no tax liability either
Takeaway
Option A is correct: for buybacks taking place on or after 01-10-2024, the amount received by the shareholder is taxed as dividend under 'income from other sources' with no deduction for cost of acquisition, while the cost of acquisition of the bought-back shares is treated as a capital loss eligible for set-off under applicable provisions.
Derivation
NISM X-B Section 13.3 states that with effect from 01-10-2024, buyback proceeds are taxed as dividend in the shareholder's hands, with no deduction for expenses or cost of acquisition against this dividend; separately, the cost of acquisition of the shares bought back is treated as a capital loss (long-term or short-term depending on holding period) eligible for set-off. The earlier regime of Section 10(34A) exemption for the shareholder plus a 20% buyback distribution tax on the company applied only to buybacks before 01-10-2024, which is a common point of confusion.
Why the others fail
B — The buyback proceeds are exempt under Section 10(34A) in Mr. X's hands, while ABC Ltd. pays buyback distribution tax at 20% plus applicable surcharge and cess
This was the rule only for buybacks taking place before 01-10-2024; for a buyback on or after that date, including this one on 20-02-2025, the proceeds are taxed as dividend in the shareholder's hands and the company bears no such tax liability.
C — The buyback proceeds are taxable as long-term or short-term capital gains in Mr. X's hands, with the cost of acquisition of the shares allowed as a deduction
For buybacks on or after 01-10-2024, the proceeds are taxed as dividend income with no deduction for cost of acquisition, not as capital gains with a cost deduction.
D — The buyback proceeds are fully exempt in Mr. X's hands, and ABC Ltd. bears no tax liability either
The buyback proceeds are not exempt; they are taxable as dividend in Mr. X's hands under 'income from other sources'.